New tax package – changes to personal taxation
In June 2020, the government submitted a proposal to the House of Commons for several major tax changes. In the end, MPs’ deliberations dragged on until 1am, several amendments were passed (notably by MP Mikulas Ferjenčík) and it is still unclear what the final form of the changes, which are intended to take effect from 1 January 2021, will be.
What changes the tax package brings:
Abolition of the super gross wage and new taxation of personal income.
Without a doubt, the most anticipated part of the tax package is the abolition of the so-called “super gross wage” and the solidarity tax.
In the case of the taxation of wages and self-employed income, the change is positive – there is an effective reduction in the tax rate. Until now, the basic rate was 15% (the effective taxation was around 20%) and a solidarity tax of 7% was added if the average wage exceeded 48 times the average wage for the calendar year (in 2021: CZK 1,701,168). However, the tax base was no longer increased by social insurance (due to the cap). The effective tax rate was still essentially around 20-22%. The new system will be a sliding scale progressive taxation, whereby persons with incomes below the previously mentioned multiple will be taxed at 15% (i.e. tax reduction), while higher incomes will be taxed at 23% (basically unchanged).
In the case of taxation of income from capital assets, real estate and other income, the change is negative – here the tax on higher incomes increases from the current 15% to 23% (i.e. for incomes above 1,701,168).
Increase in the basic taxpayer discount
The tax package also provides for an increase in the basic taxpayer rebate. The discount, which currently amounts to CZK 24,840 per year, would thus increase to CZK 34,125 (determined as the average wage for the previous year). Personally, we consider it appropriate to set the basic discount in a way that reflects the ever-increasing wages in the economy and accepts the existence of inflation.
However, this provision is opposed by the Chancellor of the Exchequer who sees it as a mere alternative to abolishing the super gross wage. The President has expressed that he will veto the tax package if the rebate is retained.
Limitation of the exemption on the transfer of securities for consideration
Current law exempts from income tax the transfer for valuable consideration of a security without any limit if there is a period of at least 3 years (5 years for common units) between the acquisition and the transfer for valuable consideration. The amendment would set a limit of CZK 20,000,000 for this exemption. However, this provision is confusing as the draft amendment does not clearly define what cases would be covered (one sale per year or per day, one security or an aggregate of securities).
It is also not explained (this is a parliamentary proposal without explanatory memorandum and transitional provisions) why, in the case of a limited liability company, the above would apply to ordinary shares (which are a security and therefore subject to the above limitation) and why the above limitation would not apply to ordinary shares in an LLC. We may be in for a mass flight from joint stock companies and LLCs with common stock certificates.
Lump sum payment
The amendment also introduces a new alternative to the employee meal allowance, which until now has essentially been either in the form of meal vouchers or discounted company meals. The new alternative is the possibility to provide employees with a cash allowance, which will be exempt from income tax and social security and health insurance contributions up to the amount determined by law (in 2020 it was CZK 72.10 per shift).
The Chamber of Deputies approved the Senate version on 22 December 2020. Thus, the following additional changes are made: the taxpayer’s discount will only be increased by CZK 3,000 and the following year also by CZK 3,000, and the limitation on the exemption on the transfer of securities for consideration has been abolished.
